Leaders 13A
merica has seen some spectacular investment booms:
think of the railways in the 1860s, Detroit’s car industry in
the 1940s or the fracking frenzy in this century. Today the latest
bonanza is in full swing, but instead of steel and sand it involves
scripts, sounds, screens and celebrities. This week Disney
launched a streaming service which offers “Star Wars” and other
hits from its vast catalogue for $6.99 a month, less than the cost
of a dvd. As the business model pioneered by Netflix is copied by
dozens of rivals, over 700m subscribers are now streaming video
across the planet. Roughly as much cash—over $100bn this
year—is being invested in content as it is in America’s oil indus-
try. In total the entertainment business has spent at least $650bn
on acquisitions and programming in the past five years.
This binge is the culmination of 20 years of creative destruc-
tion (see Briefing). New technologies and ideas have shaken up
music, gaming and now television. Today many people associate
economic change with deteriorating living standards: job losses,
being ripped-off, or living under virtual monopolies in search
and social networks. But this business blockbuster is a reminder
that dynamic markets can benefit consumers with lower prices
and better quality. Government has so far had little to do with the
boom, but when it inevitably peaks the state will have a part to
play, by ensuring that the market stays open and vibrant.
The entertainment business is fast-moving
by its very nature. It has few tangible assets, it
relies on technology to distribute its wares and
its customers crave novelty. The emergence of
sound in the 1920s cemented Hollywood as the
centre of the global film business. But by the end
of the 20th century the industry had grown as
complacent as a punchline in a repeat episode of
“Friends”. It relied on old technologies—ana-
logue broadcasting, slow internet connections and the storage of
sounds and sights on fiddly cds, dvds and hard drives. And the
commercial approach was to rip off consumers by overcharging
for stale content packaged into oversized bundles.
The first shudder came in music in 1999, with internet ser-
vices soon putting established music firms such as emiand War-
ner Music under pressure. In television Netflix broke the mould
in 2007 by using broadband connections to sell video subscrip-
tions, undercutting the cable firms. When the smartphone took
off it tailored its service to hand-held devices. The firm has acted
as a catalyst for competition, forcing the old guard to slash prices
and innovate, and sucking in new contenders. The boom has
seen star writers paid as if they were Wall Street titans, sent rents
for Hollywood studio lots into the stratosphere and overtook the
20th century’s media barons, including Rupert Murdoch, who
sold much of his empire to Disney in March.
Amid the debris and deals the outlines of a new business
model are becoming clear. It relies on broadband and devices,
not cable-packages, and overwhelmingly on subscriptions, not
advertising. Unlike in search or social media, no firm in televi-
sion and video streaming has more than a 20% market share by
revenues. The contenders include Netflix, Disney, at&t-Time
Warner, Comcast and smaller upstarts. Three tech firms are ac-
tive, too—YouTube (owned by Alphabet), Amazon and Apple, al-
though their collective market share is still small. The music in-
dustry is also contested, with the biggest firm, Spotify, having a
34% market share in America.
Disruption has created an economic windfall. Consider con-
sumers, first. They have more to choose from at lower prices and
can pick from a variety of streaming services that cost less than
$15 each compared with $80 or more for a cable bundle. Last year
496 new shows were made, double the number in 2010. Quality
has also risen, judged by the crop of Oscar and Emmy nomina-
tions for streamed shows and by the rising diversity of storytell-
ing. Workers have done reasonably. The number of entertain-
ment, media, arts and sports jobs in America has risen by 8%
since 2008 and wages are up by a fifth. Investors, meanwhile, no
longer enjoy abnormally fat profits, but those who backed the
right firms have done well. A dollar invested in Viacom shares a
decade ago is worth 95 cents today. For Netflix the figure is $37.
Many booms turn to bust. Unlike, say, WeWork, most enter-
tainment firms have a plausible strategy, but too much cash is
now chasing eyeballs. Netflix is burning $3bn a year and would
need to raise prices by 15% to break even—tricky when there are
over 30 rival services. It hopes that its fast-growing international
markets will create economies of scale. As well as saturation, the
other danger is debt. Deals and high spending
have caused American media firms to build up
$500bn of borrowing.
When the shake-out comes, history offers
two dispiriting examples of how a consumer-
friendly boom can turn into a stitch-up. Tele-
coms and airlines in America saw a riot of com-
petition in the 1990s only to become financially
stretched and then reconsolidated into oligopo-
lies that are known today for poor service and high prices.
This is why government has a role in keeping the entertain-
ment business competitive. First, it should prevent any firm—
including the tech giants—from acquiring a dominant share in
the content business. Second, it should require the companies
that own the gateways to content, such as telecoms firms or
handset providers such as Apple that can control what screens
show—to have an open-access policy and not discriminate
against particular content firms. Last, it should make sure sub-
scribers can move their personal data from one firm to another,
so they do not become locked in to one service.Don’t lose the plot
Few people look to Hollywood for economics lessons. But the en-
tertainment epic has featured vibrant capital markets. Buy-out
firms, stockmarkets and junk bonds have all financed the indus-
try’s reinvention. The stars have been billionaire entrepreneurs
such as Reed Hastings, Netflix’s boss. And open borders have set
the scene, since talent comes from around the world and a ma-
jority of streaming subscribers now live outside America. Across
the economy, these elements are at risk as politicians and voters
veer away from open trade and free markets. For a reminder of
why they matter, turn on your screen and press play. 7The $650bn binge
Creative destruction in the entertainment business has had blockbuster resultsLeaders